The FSDH Research, an arm of FSDH Merchant Bank Limited, has said, the short-term outlook of the global economy does not support strong growth in the crude oil price. It disclosed this in its report on Economic and Financial Markets Outlook (2019 – 2021), titled ’Bumpy road ahead –policy options and strategies.’
In the report, it stated that, “This has implications for crude oil-exporting countries like Nigeria. There are indications that severe weather events will raise the possibility of large swings in international food prices.
“FSDH Research is of the view that this development may accelerate inflation rate and increase the imported inflation in Nigeria. The Central Bank of Nigeria will have to adopt tight monetary policy stance to counter the negative impacts of these developments.”
The FSDH Research expects the Federal Open Market Committee of the United States Federal Reserve to raise the Federal Funds Rate three times in 2019 to a range of three per cent to 3.25 per cent. It, however, added that it did not expect a rate hike at the January 2019 meeting.
“The FOMC will have its first 2019 meeting on 29-30 January 2019,” it noted. While explaining the implications for the Nigerian economy, it stated that the expected increase in the US Fed Rate could have a negative impact on foreign capital inflows into Nigeria and foreign exchange rate.
It added that the increase in the interest rate in the international financial market might lead to higher interest expense on Federal Government’s borrowings from the international market than the existing loans; and the yields on fixed income securities might also rise leading to increase in interest expenses for corporates.
It also added that there could be rising global yields and increase in interest rates on foreign debt; monetary policy challenges and pressure on foreign currency; decrease in global financial liquidity, which could affect financial flows into the Nigerian financial market; portfolio realignments among global portfolio managers in favour of fixed income; increase in Eurobond yields; and decrease in global financial liquidity.
The FSDH Research expects the average crude oil price to drop in 2019 compared with that of 2018. “A significant decline in the crude oil price will have negative fiscal and monetary implications for the Nigerian economy,” it noted. It stated that the US and China trade war might also lead to a drop in the demand for crude oil-leading to a drop in price.
The report noted that China and US accounted for about 33 per cent of the global crude oil demand. It stated, “The OPEC production cut may reduce the Nigerian government’s revenue if crude oil price does not rise to compensate for the output cut. This will increase fiscal deficit, also put pressure on exchange rate, inflation rate and interest rates.”
While speaking on policy options, it stated that Nigerian policy makers must implement policies that would diversify the Nigerian economy, create sustainable foreign exchange stability, and also assist in lifting aggregate demand in the domestic economy.
The FSDH Research stated, “Investment in critical infrastructure will grow the key sectors of the economy and allow for stronger buffers against external shocks. It is also important to invest in human capital, quality education and healthcare in order to increase productivity in the country.
“Tight monetary policy in the form of increase in the yields on government securities will be appropriate. Adjustment in the value of the exchange rate toward N390/$.” The report also said that corporates should limit the issuance of debt instruments to short-term tenor.
It stated, “Companies should reduce foreign exchange liabilities or hedge their positions where they have to have foreign exchange exposure. This is very important for companies with no foreign exchange receivables. Investors with foreign exchange liquidity should invest in Eurobond.”